Recycled plastic: There’s market demand, but where’s the supply?

When the price of crude oil plunged to “negative” $37.63 a barrel earlier this year, it was viewed as another blow to the fledgling recycled plastics market. After all, when used correctly, virgin and recycled plastics deliver the same standards in quality, so why should one pay more?

Surely, this conventional wisdom remains sound — the use of recycled plastic is tied to the price of crude oil. Conventional wisdom, however, is not always what you expect.

Consider the introduction of the “horseless carriage.” Conventional wisdom at the time was that it would never replace the bicycle and that cars would never replace the horse-drawn carriage. Similarly, conventional wisdom was that space travel was the sole domain of highly trained astronauts, yet today it is becoming a tourism industry.

Henry Ford’s cars and Richard Branson’s space travel upended conventional wisdom by finding a fit between demand and supply. Similar market dynamics are playing out in the recycled plastics space, potentially upending the historic trend that plastic, recycled or virgin is permanently tied to the price of oil.

Stimulated by consumer sentiment, corporate commitments, anti-pollution regulation, access to funds and new business models, market demand for recycled plastic has moved from niche and “nice to have” to the new norm as the second-highest packaging trend for 2020. Supply channels for this pent-up demand are far from adequate, but the starter’s gun has fired, signaling that recycled plastic has become a market category in its own right.

Virgin, recycled and oil price

To date, cheap (and subsidized) oil prices have supplied inexpensive virgin fossil fuel-based plastics to industry. Without a dependable, high-volume alternative to offer the market, recycled plastic, with its inefficient supply-chain and high input costs, remained a niche, subject to the volatility of crude oil prices and the introduction of new cheap “fracked plastic” — polymers made from fracked resources.

This “coupling” effect is a barrier to the realization of the supply-chain efficiencies needed to drive recycled plastic quality upwards and prices downwards to meet in equilibrium. It’s a Catch-22 situation: For recycled plastic, the quality standard of feedstock has been too low and the cost base too high to foster market demand; and without market demand, the costly supply chain inefficiencies remain. For change to occur, demand and supply need to align and drive quality volumes of recycled feedstock in a consistent, cost-effective fashion.

The balance shifts

Whether for reasons altruistic, commercial or (more likely) somewhere in between, the damage caused by plastic has led to a tsunami-like wave of consumer, government and investor demand for change.

Most consumers globally (71 percent) believe that being able to trust a brand to do the right thing environmentally is a deal maker or breaker for purchase. There are over 1,000 plastic pollution-related laws globally and, last year, plastic joined climate change as the top two environmental, social and governance (ESG) risks for the $30 trillion global sustainable investment market.

Unlike carbon, which consumers cannot see or touch, many plastic products and packages have brand recognition, bringing an increased challenge for sustainability goals for companies.

Businesses know this all too well. According to McKinsey, 63 percent of businesses that pay attention to ESG performance report enhanced returns, compared to just 8 percent experiencing worsened outcomes. Accenture has identified that consumers’ “lost trust” cost global brands $2.5 trillion last year in lost business.

Whether appealing to consumer desires, managing regulatory and legal risk, appeasing shareholders or assuaging one’s conscience, multinational companies have made extensive and aggressive plastic pollution reduction pledges. Two changes are core to these commitments, which include making it recyclable (or reusable) and making it with recycled content.

Many have committed to make all of their plastic packaging “recyclable,” yet “recyclable” and “recycled” are not the same. In technical terms, plastic is already recyclable. In practice, however, the physical means and the sustainable economics to complete this circle in most countries, from first life to second life, are missing. Even highly recyclable and valued PET is not able to be fully captured, with an extensive study by GA Circular showing a loss (uncollected) of 48 percent of all PET bottles to the environment, in some form, across ASEAN.

True change requires making plastic packaging recyclable and recycled. This is why the pledges around recycled content are so important. With corporate sales revenue, cost burdens and access to investment funds impacted by their plastic choices, MNCs’ pledges to use more recycled content has created a strong, relatively inelastic market demand for recycled content. Now, it just needs the supply.

30 percent CAGR

The consumer packaged goods market is estimated to use 144 million metric tonnes of plastic packaging each year. Those accounting for 20 percent of this packaging are reportedly committed to using recycled content and have targets that need to be met by 2025. While data is limited, a few companies (including 17 consumer-facing businesses) are championing transparency with detailed disclosures in the recent 2020 Progress Report from the Ellen MacArthur Foundation. While they represent just under 7 percent of the “committed market,” when their data is extrapolated to the full 20 percent, the force of the demand shift can be seen.

In the chart above, progress against targets rose year on year, yet to achieve combined targets, the compounded annual growth rate required is 35 percent. While the assumptions to get to this number are significant, even with a generous margin for error, the CAGR to meet a demand gap of more than 6 million tonnes annually is a compelling market driver.

The journey to equilibrium

In 2018, when Asia closed most of its doors to Western waste plastic, it was hailed as a triumph in the battle to reduce plastic pollution. Almost overnight, it changed the supply market for recycled plastic in emerging economies. Without the importation of the relatively high-quality, and often subsidized, plastic bales due to container deposit schemes, the recycled plastics industry within these countries must rely on locally sourced recycled plastic to meet the growing demand, and these supply chains are far from being advanced.

Unfortunately, these markets have not developed beyond subsistence living, with most waste collection undertaken by the informal sector in a long, opaque supply chain tainted by child-labor and worker abuse and trapped by inefficiencies. Further compounding the supply issues is the poor quality of material. Commingled and contaminated, most waste plastic that is collected and sold lacks the quality required for use in new packaging.

The new Basel Amendments on plastic trading between countries, effective in early 2021, will cause further imbalances, as useable feedstock supplies of recycled content will be harder to move to processing and factories which can absorb their volumes. Small economies will find it hard to create their own domestic circular economies with the plastic they have imported as products and packages for their respective lifestyles.

To meet demand, supply must adapt. It must become localized, transparent, valued and an efficient material recovery process. And it must do it quickly. Markets that fail to adapt will become the buggy whip equivalent as manufacturing shifts to parts of the region able to supply.

Glass half-full

Some see the issues of poor quality, market shortfall and supply-chain ineffectiveness as compelling forces supporting the historic link between recycled and virgin fossil fuel-based plastics. That is to say, that they support conventional wisdom.

This position, however, ignores the vast changing realities which are driving demand. Demand is more than simple economics considered in a vacuum. Like Ford’s car and Branson’s space travel, pent-up demand will shift those barriers that were previously considered immovable.

With brand commitments creating excess demand, the tipping point where supply must respond has been reached. Being at the tipping point, however, does not diminish the enormous efforts required to achieve market equilibrium and circularity. But it does signal opportunities. With social license at risk, demand for recycled plastic is becoming inelastic and those able to supply to exacting standards will emerge and prosper.

For the environment and businesses, this represents a “glass half full” — and wanting to be overflowing. 

Jameson McLennan, an environmental studies major and economics minor at Vassar College, provided research assistance for this article.